Big Banks Halved Basel Capital Gap in First 6 Months of 2013

Global regulators have clashed with lenders over the severity of capital, indebtedness and liquidity rules, which were set out in 2010 as part of an overhaul of banking regulation to avoid a repeat of the financial crisis that followed the collapse of Lehman Brothers Holdings Inc. Photographer: Tomohiro Ohsumi/Bloomberg

March 6 (Bloomberg) -- The largest global banks halved the
shortfall in the capital they will need to meet Basel rules in
the first six months of 2013, leaving a gap of 57.5 billion
euros ($79 billion).

“Shortfalls in the risk-based capital of large
internationally active banks generally continue to shrink,” the
Basel Committee on Banking Supervision said in a statement on
its website. The figures take into account capital surcharges
set to be imposed on international lenders labeled as too big to
fail. Large European banks account for 36.3 billion of the
capital gap, according to data published today by the European
Banking Authority.

Banks also need to do more to meet a planned binding limit
on indebtedness, or leverage ratio, with almost 19 percent of a
sample of 101 large global lenders failing to meet the standard
at June 2013, according to the Basel committee.

Global regulators have clashed with lenders over the
severity of capital, indebtedness and liquidity rules, which
were set out in 2010 as part of an overhaul of banking
regulation to avoid a repeat of the financial crisis that
followed the collapse of Lehman Brothers Holdings Inc.

The measures, known as Basel III, more than triple the core
capital that lenders must have to at least 7 percent of their
assets, weighted for risk.

Sustained Process

“While it’s encouraging to see the improvements in banks’
capital positions, it has to be remembered that one of the
reasons for this is the sustained process of deleveraging that
has been taking place,” Richard Reid, a research fellow for
finance and regulation at Scotland’s University of Dundee, said
in an e-mail.

“It remains the case that the supply of credit in a number
of economies and especially in the euro zone, continues to be
quite tight,” Reid said. This situation is likely to persist
for some time yet and will therefore go on hampering economic
growth.’’

Banks can plug gaps in capital by either boosting their
retained earnings, issuing more securities eligible to count as
capital or by reducing their assets weighted for risk.

Under the Basel plan, banks will have to begin disclosing
how well they measure up to the leverage ratio from 2015.

While the standard Basel 7 percent rule must be met with
common equity core Tier 1 capital, the toughest and narrowest
definition of eligible securities, the leverage ratio uses Tier
1, a broader measure.

Basel Requirements

It also differs from normal Basel requirements by denying
banks any scope to take into account the riskiness of their
assets when working out their capital needs.

The Basel group has said that the leverage ratio target,
set at 3 percent of a bank’s assets, should act as a backstop to
prevent lenders’ capital levels from falling too low.

Assuming the whole sample of international lenders met
other Tier 1 capital requirements, they would still need a
further 56.8 billion euros to meet the leverage ratio, the Basel
group said.

Still, for “close to three-quarters” of banks assessed by
the Basel committee, their normal capital requirements would be
higher than the leverage ratio, it said.

The Basel figures on bank’s ability to meet the leverage
rule are based on “approximations” of the impact of revisions
published by the committee in January, and should be seen as
conservative, the group said.

Safety Net

The Basel III basic capital requirements are scheduled to
phase in fully by 2019.

The group also said that the banks would have needed an
extra 536 billion euros in easy-to-sell assets to fully comply
with a planned liquidity rule, had it in been in force at the
end of June 2013.

That measure, known as the liquidity coverage ratio or LCR,
will start to be phased in next year and will fully apply from
2019. Banks had a collective shortfall of 168 billion euros in
the easy-to-sell assets needed to comply with the version of the
rule that will be in force next year.

A total of 227 banks participated in the Basel study,
including 102 large global banks -- defined as those that are
internationally active and have Tier 1 capital of more than 3
billion euros. Not all the banks participated in every part of
the survey.